D.R. Mason Construction Co. v. GBOD, LLC et al

Filing
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ORDER granting Defendants' 6 Motion to Dismiss for Lack of Subject Matter Jurisdiction. Plaintiff's federal securities claims do not pose a substantial federal question and are subject to dismissal. Court dismisses Plaintiff's Complaint with leave to amend. Signed by Judge Cynthia Bashant on 3/13/2018. (jah)

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UNITED STATES DISTRICT COURT
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SOUTHERN DISTRICT OF CALIFORNIA
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Case No. 17-cv-01779-BAS-WVG
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D.R. MASON CONSTRUCTION
CO.,
Plaintiff,
ORDER GRANTING
DEFENDANTS’ MOTION TO
DISMISS FOR LACK OF
SUBJECT MATTER
JURISDICTION
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v.
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[ECF No. 6]
GBOD, LLC, et al.,
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Defendants.
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Plaintiff D.R. Mason Construction Company commenced this lawsuit against
22 Defendants GBOD, LLC and Raymond Davoudi pursuant to the anti-fraud
23 provisions of the Securities Exchange Act of 1934. (Compl. ¶¶ 1-2, ECF No. 1.)
24 Plaintiff alleges that Defendants fraudulently induced it to invest in securities in
25 exchange for work completed at a restaurant. (Id. ¶ 1.) Plaintiff claims it completed
26 the work but never received the five percent ownership interest it was promised. (Id.)
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Presently before the Court is Defendants’ motion to dismiss Plaintiff’s action
28 for lack of subject matter jurisdiction. (Mot., ECF No. 6.) Defendants argue that
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1 dismissal is proper because the purported investment agreement did not implicate
2 federal securities laws. (Id.) Plaintiff opposes. (Opp’n, ECF No. 7.)
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The Court finds this motion suitable for determination on the papers submitted
4 and without oral argument. See Fed. R. Civ. P. 78(b); Civ. L.R. 7.1(d)(1). For the
5 reasons that follow, the Court grants Defendants’ motion to dismiss for lack of
6 subject matter jurisdiction and dismisses Plaintiff’s Complaint with leave to amend.
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8 I.
BACKGROUND
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Plaintiff D.R. Mason Construction Co. is a corporation with its principal place
10 of business in San Diego, California. (Compl. ¶ 3.) In October 2014, Defendants
11 GBOD, LLC and Raymond Davoudi “accepted a bid and retained Plaintiff as a
12 general contractor to perform construction work at Meze, a restaurant in Downtown
13 San Diego.” (Id. ¶ 10.) GBOD, LLC, doing business as Meze Greek Fusion, is a
14 California limited liability company with its principal place of business in San Diego.
15 (Id. ¶ 6.) Davoudi resides in San Diego and is “an owner, CEO, a managing partner,
16 and an officer at both GBOD and Meze.” (Id. ¶ 7.)
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Defendants allegedly hired Plaintiff to “oversee the project from interior
18 design to completion.” (Compl. ¶ 10.) Upon receiving its first check for $5,000 on
19 November 3, 2014, Plaintiff began work on the restaurant. (Id. ¶ 11.) Over the
20 following two weeks, Plaintiff received its second and third checks worth $15,000
21 and $20,000 respectively. (Id. ¶ 12.)
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On November 19, 2014, “Defendants accepted a written bid proposal for the
23 Project in the amount of $91,300” from Plaintiff. (Compl. ¶ 13.) “In addition to
24 receiving $40,000 in compensation, an amount of $5,500 was credited against the
25 account.” (Id.)
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Soon after, Plaintiff and Defendant Davoudi allegedly orally agreed to the
27 following terms: (1) Plaintiff would receive a five percent ownership interest stake
28 in Meze for the work that it already performed and had not been paid for, as well as
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1 the work that it was going to perform at Meze, and (2) “Plaintiff would receive the
2 first dividend payment as well as the certificates reflecting its five percent ownership
3 interest in Meze in September 2015, three quarters after the New Year’s grand
4 opening of Meze.” (Compl. ¶ 14.)
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Plaintiff, allegedly relying on the oral agreement, continued performing
6 services for Meze, which “increased the original contract price from $91,300.00 to
7 $105,128.00.” (Compl. ¶ 16.) “Defendants reiterated that Plaintiff would be
8 compensated for the additional work performed by becoming a five percent
9 shareholder of Meze in September 2015.” (Id.) Plaintiff then allegedly completed its
10 work on December 31, 2014, “just in time for the New Year’s Eve Grand Opening.”
11 (Id.) Once the work was completed, Defendants allegedly claimed that they were
12 unable to completely compensate Plaintiff for the work and so requested “that the
13 balance of $1,000 be added to the remaining $68,625.00, and Plaintiff agreed.” (Id.
14 ¶ 18.)
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Over the next few months, Defendants allegedly claimed repeatedly that
16 “Plaintiff would receive the remaining balance of $69,625.00 by becoming a five
17 percent shareholder of Meze and [would receive] dividend payments.” (Compl. ¶ 19.)
18 September 15, 2015, came and went, and Plaintiff allegedly did not receive “a
19 certificate reflecting its ownership interest nor has it received any dividends.”
20 (Id. ¶ 26.)
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Based on the foregoing, Plaintiff asserts the following eight causes of action:
22 (1) breach of contract; (2) specific performance; (3) violation of Rules 10(b) of the
23 Securities Exchange Act of 1934 (“Exchange Act”) and SEC Rule 10-b5 1;
24 (4) violation of section 20(a) of the Exchange Act; (5) fraudulent inducement;
25 (6) negligent misrepresentation; (7) California Securities Fraud; and (8) violations of
26 California Business and Professions Code section 17200 et seq. (Compl. ¶¶ 29–79.)
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15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5.
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Plaintiff asserts that this Court has jurisdiction over counts three and four (its
2 federal securities claims) pursuant to 28 U.S.C. § 1331 and 15 U.S.C. § 78aa. (Compl.
3 ¶ 2.) Consequently, if the Court has jurisdiction over these counts, Plaintiff asserts
4 that this Court has supplemental jurisdiction over Plaintiff’s related state claims
5 pursuant to 28 U.S.C. § 1367. (Id.) Defendants now move to dismiss Plaintiff’s
6 Complaint with prejudice, arguing that it fails to implicate federal securities laws,
7 thereby failing to invoke federal question jurisdiction. (Mot.)
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9 II.
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LEGAL STANDARD
Under Rule 12 of the Federal Rules of Civil Procedure, a party may move to
11 dismiss a claim based on a lack of subject matter jurisdiction. Fed. R. Civ. P. 12(b)(1).
12 “Federal courts are courts of limited jurisdiction” and “possess only that power
13 authorized by Constitution and statute.” Kokkonen v. Guardian Life Ins. Co. of
14 Am., 511 U.S. 375, 377 (1994). Accordingly, “[a] federal court is presumed to lack
15 jurisdiction in a particular case unless the contrary affirmatively appears.” Stock W.,
16 Inc. v. Confederated Tribes, 873 F.2d 1221, 1225 (9th Cir. 1989). “[T]he burden of
17 establishing the contrary rests upon the party asserting jurisdiction.” Kokkonen, 511
18 U.S. at 377.
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A plaintiff invoking this jurisdiction must show “the existence of whatever is
20 essential to federal jurisdiction,” and if the plaintiff fails to do so, the court “must
21 dismiss the case, unless the defect [can] be corrected by amendment.” Tosco Corp. v.
22 Cmtys. for a Better Env’t, 236 F.3d 495, 499 (9th Cir. 2001) (per curiam) (quoting
23 Smith v. McCullough, 270 U.S. 456, 459 (1926)), abrogated on other grounds by
24 Hertz Corp v. Friend, 559 U.S. 77 (2010).
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A challenge to subject matter jurisdiction under Rule 12(b)(1) can be either
26 facial or factual. See White v. Lee, 227 F.3d 1214, 1242 (9th Cir. 2000). In a facial
27 attack, the challenger asserts that the allegations in the complaint are insufficient to
28 invoke federal jurisdiction. See Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039
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1 (9th Cir. 2004). To resolve this challenge, the court limits its review to the allegations
2 in the complaint, assumes the allegations in the complaint are true, and draws all
3 reasonable inferences in favor of the party opposing dismissal. Id.; see also Wolfe v.
4 Strankman, 392 F.3d 358, 362 (9th Cir. 2004).
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6 III.
DISCUSSION
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Defendants facially challenge Plaintiff’s Complaint, arguing that it fails to
8 assert a substantial federal question. There is no federal question jurisdiction when
9 the claim asserted is “insubstantial.” Hagans v. Lavine, 415 U.S. 528, 537-38 (1974).
10 A claim is insubstantial when “its unsoundness so clearly results from the previous
11 decisions of this court as to foreclose the subject and leave no room for the inference
12 that the questions sought to be raised can be the subject of controversy.” Id. at 538.
The potential source for a substantial federal question is Plaintiff’s third claim
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14 for violation of the Exchange Act. 2 Section 10(b) of the Exchange Act prohibits
15 (1) use of the mails or other instrumentality of interstate commerce (2) to use or
16 employ a manipulative or deceptive device (3) in connection with the purchase or
17 sale of any security. 15 U.S.C. § 78j(b). Plaintiff alleges Defendants violated this
18 provision in making false statements to fraudulently induce Plaintiff “to invest in
19 Meze by constructing it without being fully compensated for the work.” (Compl. ¶
20 45.)
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Defendants attack the substantiality of Plaintiff’s claim on two grounds. First,
22 they argue that the oral agreement at issue did not involve a security under federal
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Plaintiff’s fourth claim invokes section 20(a) of the Exchange Act, which “provides for
derivative liability of those who ‘control’ others found to be primarily liable under the 1934 Act.”
In re Ramp Networks, Inc. Sec., 201 F. Supp. 2d 1051, 1063 (N.D. Cal. 2002) (citing 15 U.S.C. §
78t(a)). Thus, this claim is derivative of Plaintiff’s third claim and similarly fails if Plaintiff does
not plead a federal question under its third claim. See Heliotrope Gen., Inc. v. Ford Motor Co., 189
F.3d 971, 978 (9th Cir. 1999) (“To be liable under section 20(a), the defendants must be liable
under another section of the Exchange Act.”); see also In re Ramp Networks, Inc. Sec., 201 F. Supp.
2d at 1063 (finding that the pleading requirements for violations of sections 20(a) and 10(b) of the
Exchange Act are the same).
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1 law. (Mot. 6–9.) Second, Defendants claim Plaintiff fails to satisfy the interstate
2 commerce element. (Mot. 10.) The Court agrees and consequently grants the Motion
3 to Dismiss.
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A.
“Security” Within the Meaning of the Federal Securities Laws
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Section 10(b) of the Exchange Act is implicated when there is a “purchase or
7 sale of any security.” 15 U.S.C. § 78j(b). Section 2(a)(1) of the Securities Act of 1933
8 lists the financial instruments that qualify as securities:
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The term ‘security’ means any note, stock, treasury stock, bond,
debenture, evidence of indebtedness, certificate of interest or
participation in any profit-sharing agreement . . . , investment
contract . . . , or, in general, any interest or instrument commonly known
as a ‘security’, or any certificate of interest or participation in, temporary
or interim certificate for, receipt for, guarantee of, or warrant or right to
subscribe to or purchase, any of the foregoing.
14 15 U.S.C. § 77b(1). The scope of a “security” is “quite broad.” Marine Bank v.
15 Weaver, 455 U.S. 551, 555 (1982). The policy behind the Exchange Act was to
16 “restore investors’ confidence in the financial markets, and the term ‘security’ was
17 meant to include ‘the many types of instruments that in our commercial world fall
18 within the ordinary concept of a security.”’ Id. at 555-56 (quoting H.R. Rep. No. 7319 85, at 11 (1933)).
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The statutory definition of a security under the Exchange Act includes ordinary
21 stocks and bonds, along with the “countless and variable schemes devised by those
22 who seek the use of the money of others on the promise of profits . . . .” SEC v.
23 Howey, Co., 328 U.S. 293, 299 (1946). “Thus, the coverage of the antifraud
24 provisions of the securities laws is not limited to instruments traded at securities
25 exchanges and over-the-counter markets, but extends to uncommon and irregular
26 instruments.” Marine Bank, 455 U.S. at 556 (citing Superintendent of Ins. of N.Y. v.
27 Bankers Life & Cas. Co., 404 U.S. 6, 10 (1971)); accord SEC v. M. Joiner Leasing
28 Corp., 320 U.S. 344, 351 (1943).
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However, Congress “did not intend to provide a broad federal remedy for all
2 fraud.” Marine Bank, 455 U.S. at 556 (citing Great W. Bank & Trust v. Kotz, 532
3 F.2d 1252, 1253 (9th Cir. 1976)). Nor did Congress intend for the federal securities
4 laws to be a “substitute for state fraud and breach of contract actions.” Robinson v.
5 Glynn, 349 F.3d 166, 175 (4th Cir. 2003) (quoting Marine Bank, 455 U.S. at 556).
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Two tests used to determine whether a particular investment instrument
7 constitutes a security under federal law are applicable to this case. When the
8 investment instrument is “uncommon and irregular”—one that is not listed in the
9 statute’s definition—courts use the “Howey investment contract test.” See Howey,
10 328 U.S. at 293. An investment contract, one of the enumerated types of securities in
11 the Securities Act, is a “flexible principle,” able to “meet the countless and variable
12 schemes devised by those who seek the use of the money of others on the promise of
13 profits.” Id. at 299.
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On the other hand, when the instrument at issue is “traditional stock,” “there
15 is no need . . . to look beyond the characteristics of the instrument to determine
16 whether the [Securities] Acts apply.” Landreth Timber Co. v. Landreth, 471 U.S.
17 681, 686, 690 (1985) (quoting United Hous. Found., Inc. v. Forman, 421 U.S. 837,
18 850 (1975)). After all, traditional stock “represents to many people, both trained and
19 untrained in business matters, the paradigm of a security.” Id. at 693 (quoting Daily
20 v. Morgan, 701 F.2d 496, 500 (5th Cir. 1983)). “Thus, persons trading in traditional
21 stock likely have a high expectation that their activities are governed by the Acts.”
22 Id.
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The “5 Percent Interest” Is Not a “Stock”
“[W]hen an instrument is both called ‘stock’ and bears stock’s usual
26 characteristics . . . there is no need . . . to look beyond the characteristics of the
27 instrument to determine whether the [Securities] Acts apply.” Landreth, 471 U.S. at
28 686, 690 (quoting Forman, 421 U.S. at 850). However, “the fact that instruments
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1 bear the label ‘stock’ is not of itself sufficient to invoke the coverage of the Acts.”
2 Id. at 686. The instruments must also possess stock’s usual characteristics. Id.
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The five most common characteristics of stock are: (1) “the right to receive
4 dividends contingent upon an apportionment of profits; (2) negotiability; (3) the
5 ability to be pledged or hypothecated; (4) the conferring of voting rights in proportion
6 to the number of shares owned; and (5) the capacity to appreciate in value.” Landreth,
7 471 U.S. at 686 (citing Forman, 421 U.S. at 851).
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Forman illustrates how the Supreme Court handled an irregular financial
9 instrument that was labeled “stock.” See Forman, 421 U.S. at 850-51. In that case, a
10 non-profit housing cooperative sold shares of “stock” to prospective tenants. Id. at
11 842. The only purpose behind the stock, however, was to allow the tenant to acquire
12 an apartment unit in the complex. See id. at 842-43. In other words, the stock was
13 merely a recoverable deposit on the apartment. See id. Moreover, the stocks were
14 non-transferable, were not able to be pledged or hypothecated, and did not grant
15 voting rights. See id. at 842.
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The Court concluded that the stock in the apartments did not constitute a
17 security because it lacked the five most common features of traditional stock. See
18 Forman, 421 U.S. at 851-52. Furthermore, the stock was not a security because the
19 tenants bought the stock in order to acquire a living space, not to invest for profit. See
20 id.; see also Landreth, 471 U.S. at 693 (concluding that the federal securities laws
21 were implicated because the instrument at issue there—all of the outstanding stock
22 in a lumber business—was “quintessential stock”).
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Here, Plaintiff contends that Defendants promised to give it “a five percent
24 interest in Meze in exchange for the work it had performed and had not been
25 compensated as well as the work that it was going to perform at Meze,” and that
26 “Plaintiff would receive the first dividend payment as well the certificates reflecting
27 its five percent ownership interest in Meze on September 2015, three quarters after
28 the [2014] New Year’s Grand Opening of Meze.” (Compl. ¶ 5.) Based on these
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1 allegations, Plaintiff argues that the oral investment agreement between the parties
2 involved a regulated security because the “Agreement at issue was for stock and
3 ownership interest in Meze reflected by share certificates and dividend payments.”
4 (Opp’n at 7.) Plaintiff continues:
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Given that stocks are the type of instrument that fall within the ordinary
concept of a security, and they are commonly thought to be a security, the
Agreement at issue is the type of instrument that the Congress intended
the securities laws to cover. Therefore, the Agreement here is considered
to be a security within the Exchange Act’s definition of a security.
9 (Opp’n at 7-8.)
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The Court is unconvinced. Plaintiff’s Complaint never mentions the word
11 “stock.” Rather, Plaintiff’s pleading alleges Defendants promised it “a five percent
12 interest in Meze.” (Compl. ¶ 14.) Landreth applies when the “instrument is both
13 called stock and bears stock’s usual characteristics.” See Landreth, 471 U.S. at 686
14 (emphasis added). People dealing with traditional stock “likely have a high
15 expectation that their activities are governed by the [Exchange Act].” See id. at 693
16 (quoting Morgan, 701 F.2d at 500). But, when the agreement does not involve
17 traditional stock or mention the word stock, the policy underlying this test is
18 inapposite. See id.
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Furthermore, although Plaintiff’s Complaint does separately mention the term
20 “shareholder,” the Court will not draw the inference that this term means Plaintiff
21 was promised traditional “stock.” This inference would not be reasonable in these
22 circumstances because Plaintiff alleges in its Complaint that Defendant GBOD is a
23 limited liability company, not a corporation. (Compl. ¶ 3.) Under California law,
24 LLCs distribute “membership interests,” not shares of stock. See Cal. Corp. Code §
25 17704.07. Consequently, Plaintiff’s pleading indicates the financial instrument at
26 issue is not traditional stock. Moreover, courts tasked with deciding whether LLC
27 membership interests constitute a security under the Exchange Act generally evaluate
28 whether such interests are “investment contracts,” not “stocks.” See, e.g., Burnett v.
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1 Rowzee, No. SACV 07641 DOCANX, 2007 WL 2809769, at *4 (C.D. Cal. Sept. 26,
2 2007); Affco Invs. 2001, L.L.C. v. Proskauer Rose, L.L.P., 625 F.3d 185, 189 (5th
3 Cir. 2010); United States v. Leonard, 529 F.3d 83, 87 (2d Cir. 2008); Robinson, 349
4 F.3d at 170; Great Lakes Chem. Corp. v. Monsanto Co., 96 F. Supp. 2d 376, 389 (D.
5 Del. 2000).
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Therefore, because Plaintiff does not allege Defendants promised it “stock,”
7 and because Plaintiff acknowledges Defendant GBOD is a limited liability company,
8 the Court concludes Plaintiff does not allege the existence of a security under the
9 traditional stock test from Landreth.
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The “5 Percent Interest” Is Not an “Investment Contract”
The Securities Act’s definition of a “security” encompasses an “investment
13 contract.” 15 U.S.C. § 77b(1). This term has been interpreted to reach “[n]ovel,
14 uncommon, or irregular devices, whatever they appear to be . . . .” Joiner Leasing,
15 320 U.S. at 351. As mentioned above, it “embodies a flexible rather than a static
16 principle, one that is capable of adaptation to meet the countless and variable schemes
17 devised by those who seek the use of the money of others on the promise of profits.”
18 Howey, 328 U.S. at 299. The Howey Court devised the classic definition of an
19 investment contract:
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[A]n investment contract for purposes of the Securities Act means a
contract, transaction or scheme whereby a person invests his money in a
common enterprise and is led to expect profits solely from the efforts of
the promoter or a third party, it being immaterial whether the shares in
the enterprise are evidenced by formal certificates or by nominal interests
in the physical assets employed in the enterprise.
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25 Id. at 298-99. In sum, the three requirements for establishing an investment contract
26 are: (1) “an investment of money,” (2) “in a common enterprise,” and (3) “with profits
27 to come solely from the efforts of others.” Id. at 301.
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1
While Howey’s third prong requires an expectation of profits solely from the
2 efforts of the promoter or third party, “solely” does not require “a strict or literal
3 limitation on the definition of an investment contract”; rather, the term “must be
4 construed realistically, so as to include within the definition those schemes which
5 involve in substance, if not form, securities.” SEC v. Glenn W. Turner Enters., Inc.,
6 474 F.2d 476, 482 (9th Cir. 1973). Thus, the third prong requires that “the efforts
7 made by those other than the investor are the undeniably significant ones, those
8 essential managerial efforts which affect the failure or success of the enterprise.” Id.
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In addition to satisfying the three Howey requirements, plaintiffs seeking to
10 demonstrate an “investment contract” must also satisfy a fourth requirement set forth
11 in Marine Bank, 455 U.S. at 560. A plaintiff must show that the investment scheme
12 was offered to several potential investors, not just to it. Mace Neufeld Prods., Inc. v.
13 Orion Pictures Corp., 860 F.2d 944, 946 (9th Cir. 1988) (quoting Marine Bank, 455
14 U.S. at 560). In other words, the plaintiff must demonstrate that the investment
15 scheme was not a single unique agreement, negotiated one-on-one, without any
16 intention of the investment agreement to be publicly traded. Id. (quoting Marine
17 Bank, 455 U.S. at 560).
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Here, Plaintiff does not plead sufficient facts to demonstrate all of the
19 requirements for an investment agreement are satisfied. For example, Plaintiff does
20 not plead facts regarding whether GBOD, LLC offered this same investment scheme
21 to other investors or if it was just a unique, single agreement with Plaintiff. Moreover,
22 Plaintiff fails to satisfy the third Howey prong because Plaintiff’s allegations do not
23 indicate whether under the terms of the agreement it was going to have essential
24 managerial responsibilities in Meze. See Turner Enters., Inc., 474 F.2d at 482.
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Therefore, because Plaintiff fails to allege that Defendants offered the
26 investment scheme to other investors, and because it does not allege what managerial
27 responsibilities, if any, it was to have in Meze, the Court concludes that Plaintiff does
28 not allege the existence of a security under the investment contract test from Howey.
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In sum, Plaintiff’s allegations do not demonstrate that the “5 percent interest”
2 in GBOD, LLC is either traditional “stock” or an “investment contract” under the
3 Securities Act. Consequently, Plaintiff’s third claim fails to pose a substantial federal
4 question because it does not involve the “purchase or sale of any security.” See 15
5 U.S.C. § 78j(b). This claim is therefore subject to dismissal, but the Court will grant
6 Plaintiff leave to amend because it may be able to plead additional facts addressing
7 this issue. See Fed. R. Civ. P. 15(a).
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B.
Instrumentality of Interstate Commerce
Defendants argue that Plaintiff fails to demonstrate the use of any
11 instrumentality of interstate commerce in the alleged fraud. (Mot. 10.) Plaintiff
12 counters that Defendants used the banking system, an instrumentality of interstate
13 commerce, to deliver checks to Plaintiff for some of its services. (Opp’n 8.)
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Section 10(b) of the Exchange Act requires that there be a “use of any means
15 or instrumentality of interstate commerce or of the mails, or of any facility of any
16 national securities exchange.” 15 U.S.C. § 78j. However, “[t]he use of an
17 instrumentality of commerce need not be itself a fraudulent act; it suffices if the use
18 is ‘in furtherance of the alleged fraud.’” Shepherd v. S3 Partners, LLC, No. C-0919 01405 RMW, 2011 WL 4831194, at *6 (N.D. Cal. Oct. 12, 2011) (quoting Hilton v.
20 Mumaw, 522 F.2d 588, 602 (9th Cir. 1975)). Moreover, 15 U.S.C. § 78c defines
21 “interstate commerce” in relevant part as:
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[T]rade, commerce, transportation, or communication among the several
States . . . intrastate use of (A) any facility of a national securities
exchange or of a telephone or other interstate means of communication,
or (B) any other interstate instrumentality.
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Here, Plaintiff contends that Defendants’ “[u]se of the banking system to
27 deliver checks to [it] as payment for some of [its] services constitutes a use of
28 instrumentality of interstate commerce.” (Opp’n at 8.) Although that may be true, the
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1 Court is not persuaded that Plaintiff adequately pleads this instrumentality was used
2 in furtherance of the alleged fraud.
3
Defendants allegedly hired Plaintiff to oversee construction of the Meze
4 restaurant. (Compl. ¶ 10.) On November 3, 2014, upon receipt of a $5,000 check,
5 “Plaintiff began work as described in the construction bid.” (Compl. ¶ 11.) Then,
6 Plaintiff received two more checks on November 6 and November 18, 2014, worth
7 $15,000 and $20,000 respectively. (Id. ¶ 12.) Thus, the checks delivered by
8 Defendants were for construction work Plaintiff already performed, not for any
9 security.
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Thereafter, on November 19, 2014, Plaintiff and Davoudi allegedly met in
11 person and struck an oral agreement whereby Davoudi purportedly deceived Plaintiff
12 by promising it a “5 percent interest in Meze in exchange for the work that it had
13 performed and had not been compensated as well as the work that it was going to
14 perform at Meze.” (Id. ¶ 14.) This face-to-face agreement occurred after the three
15 checks were delivered. Therefore, the Court fails to see how an alleged face-to-face
16 agreement for an interest in Meze implicates the use of an instrumentality of interstate
17 commerce.
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Consequently, because Plaintiff pleads insufficient facts underlying how
19 Defendants used an instrumentality of interstate commerce to further its purported
20 fraudulent securities scheme, the Court concludes this element is not satisfied. That
21 being said, the Court recognizes that the interstate commerce requirement is a low
22 bar, and it is possible for Plaintiff to satisfy this requirement if it can provide
23 sufficient facts showing that Defendants’ use of the banking system—or any other
24 instrumentality of interstate commerce—was “in furtherance of the alleged fraud.”
25 See Hilton, 522 F.2d at 602. The Court will therefore grant Plaintiff leave to amend
26 to address this issue. See Fed. R. Civ. P. 15(a).
27 //
28 //
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1 IV.
CONCLUSION
2
For the foregoing reasons, Plaintiff’s federal securities claims do not pose a
3 substantial federal question and are subject to dismissal.3 Thus, the Court GRANTS
4 Defendants’ Motion to Dismiss for lack of subject matter jurisdiction and
5 DISMISSES Plaintiff’s Complaint with leave to amend.
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IT IS SO ORDERED.
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8 DATED: March 13, 2018
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Further, because the Court concludes it does not have original jurisdiction over any claims
28 in Plaintiff’s Complaint, there is no basis to exercise supplemental jurisdiction over Plaintiff’s
various state law claims. See 28 U.S.C. § 1367.
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